Competitive selection and international trade under monopolistic competition

• Main Author: Montagna, Catia
• Other Authors: Chatterji, Monojit
• Published: University of Dundee 1995
• Subjects: 381
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.534367

The industrial economics and trade theory literatures of Chamberlinian monopolistic competition generally assume homogeneity of technologies between firms and countries. This assumption clashes with the evidence emerging from even a casual observation of the real world where industries including those exposed to international competition are characterized by persistent efficiency gaps both within and across countries.This thesis constructs a monopolistically competitive framework of non-localized competition where inter-firm and inter-country technical heterogeneity is explicitly allowed for and modelled as randomly determined and persistent efficiency gaps.The effects of inter-firm efficiency gaps on the long-run equilibrium of the monopolistic competition model are analyzed. In the presence of cost asymmetries free entry leads to the endogenization of the level of industry efficiency through a competitive selection process whereby more efficient entrants displace less efficient incumbents in the industry. Contrary to the standard model, entry will not drive profits to zero for intramarginal firms and the long-run equilibrium will be characterized by a dispersion of efficiencies, market shares and profits.The implications of technical heterogeneity for international trade have been analyzed by constructing a two country model where an efficiency gap between the two competitors takes the form of a difference in the mean of their efficiency distributions. The results stemming from the analysis differ significantly from the predictions of the standard homogeneous technology model and cast doubt on the widely acknowledged role of trade as a source of industry rationalization. Trade is shown to affect efficiency on two levels and with respect to both the two countries experience asymmetric effects. By unifying the competitive conditions in which firms operate, at the industry level trade modifies the efficiency structure of the population of firms which survive in steady-state.At the firm level, it affects the expected scale of production of firms. These asymmetric efficiency effects generate a pattern of international specialization characterized by asymmetric market shares. The welfare effects of trade are also asymmetrically distributed between the two countries and circumstances are identified in which at least one country experiences a net welfare loss from trade.